Peloton x Beyonce: Will Peloton follow Netflix's playbook?
Last week Peloton grabbed headlines after partnering with Beyonce on a multiyear deal that will include a curated series of themed workouts across all categories offered on the Peloton app, including cycling, running, strength, boot camp, yoga, and meditation. As a result, the Shares of Peloton surged 8 percent on Tuesday after the partnership announcement. In other words, Peloton's market cap went up $2.5 billion in 3 hours of announcing the deal with Beyoncé.
“Music is a core part of the Peloton business model and is responsible for much of the brand’s swift success,” said NMPA President and CEO David Israelite said in a statement. “Thousands of exclusive videos and playlists are a major reason hundreds of thousands of people have purchased Peloton products." True? This may be a bit of a stretch but it is undeniable that music is an integrated part of the business of a company that in my view is more of a content business than a hardware business.
Two-thirds of Peloton's subscribers are digital-only subscribers, which are similar to subscribers of Netflix, who subscribe for entertainment content whereas Peloton subscribers subscribe for fitness content. Peloton's CEO has quoted in the past: “100 million subscribers, we believe is a reasonable goal.”
So back in 2012, Netflix signed its first Netflix Original deal - "House of Cards", which set it on a course, where today it is expected to spend $17B on original content in 2020. Arguably, this spending has led to its position as the default entertainment hub for 170M subscribers, ~ over 500M viewers, around the world. The chart below shows a strong correlation (95%+) between the number of Netflix Original titles and subscriber growth. It was not just the number of titles but also the localization of those titles in large markets such as Europe and India, that allowed Netflix to acquire a new wave of users.
So, the key question is will Peloton follow Netflix's path, and why?
While the Beyonce deal could just be a one-off experiment, it could very well be the first of many original music deals to come. And there are good reasons to do so, here are 3:
- At scale, licensing is expensive and undifferentiated
In the past, Peloton got in trouble since the National Music Publishers Association (NMPA) sued Peloton in March of last year for illegally using thousands of songs in video fitness classes offered through its subscription service. Peloton said in its Q3 earnings that it has added thousands of publishers since. If you are watching a class as a video from your Peloton at home, the music played requires what is called a sync license, because the music is synchronized with visual media output. This can be an expensive line item and doesn't allow the platform to differentiate since all other platforms have the same access.
Now, Peloton is signing Beyoncé directly rather than through a publisher and has established a clear path for artists to join Peloton directly. As Peloton tries to scale, this strategy can enable it to differentiate, attract new consumers, and increase negotiation leverage with the publishers while reducing the overall cost since it will have a large consumer base to amortize this expense.
2. Greater need for localization as Peloton becomes a global brand
Localization will become a key priority as Peloton becomes a global brand. This means signing up local trainers and artists to create original content for a particular country. For example, Peloton could hire local trainers and celebrities in India to do a "Bollywood" inspired fitness program. Given the large size of the country, growing middle class, and one of the largest young (<25) population in the world, India could alone be a country with 25M+ potential subscribers.
3. More verticalization leads to more control, which leads to differentiated consumer experiences, which in turn creates defensible moats
Peloton is a great example of a tight integrated and verticalized business model. Some would argue it is the Apple of the Fitness industry. As the industry matures and gets crowded with competition, there will be a greater need for it to build moats around its business. It has already done a great job in hiring and grooming some of the best trainers, whom themselves have become a key point of differentiation for the brand. So the next logical stop was original scripted content such as a series of Homecoming-themed workouts featuring Beyonce and some of the leading trainers at Peloton.
“Previously they didn’t carry her music, so this is going to extend what is already a competitive advantage for Peloton. The depth of their music catalog extends that advantage further,” said James Hardiman, managing director at Wedbush Securities analysts.
And the consumers concur, as one of them says, "a few years ago, I discovered a foolproof antidote to a lack of motivation: Beyoncé. Lately, when I'm struggling to convince myself to actually get up and log into that Zoom workout, I've been hyping myself up with songs from her repertoire. What can I say? Lyrics like, "I came to slay, bitch" just do something to me."
In summary, this strategy has legs to grow and can become a defensible moat for Peloton. And if Peloton decides to follow Netflix's path, it can be assured of access to cheap capital as evidenced by the rise of Netflix's stock price, which has grown almost 40X since the launch of its original content back in 2012. Clearly, Wall Street is willing to fund such ambitious investments that can fuel subscriber growth and build defensibility. The question is: will Peloton play offense as Netflix did?